In Media Releases

Media ReleaseConsultation on Changes to the Bank's Standards for Card Payment Systems

Number2015-24

Date3 December 2015

In March, the Reserve Bank commenced a review of the regulatory framework for card
payments. As part of this process, the Bank released an Issues Paper that
noted some developments in the payments system that raised concerns given
the Bank's mandate to promote competition and efficiency in the payments
system. Bank staff have since consulted extensively with stakeholders on
these matters.

At its meeting of 20 November, the Payments System Board agreed to consult on changes
to the standards for card payment systems. The Bank has today released a
Consultation
Paper containing amended draft standards. A summary of the proposed
reforms is provided below and in some Q&A
on the Bank's website. Stakeholders are invited to make submissions on
the draft standards by 3 February.

The draft standards include changes to the regulation of surcharges on card payments
and interchange payments in card systems. In preparing the draft changes
to the surcharging standard, Reserve Bank staff have consulted with staff
from the Treasury and the Australian Competition and Consumer Commission
(ACCC) regarding the Government's plans to ban excessive surcharging
and give enforcement powers to the ACCC. The Government has today announced
draft legislation that will insert a ban on surcharging in excess of merchant
costs into the Competition
and Consumer Act (2010).

Changes to the Bank's Surcharging Standard

Merchants incur costs when they accept a payment from a customer, and different payment
methods can have very different payment costs; cards that provide significant
rewards to consumers are typically significantly more expensive for merchants.
When merchants have the right to surcharge on more expensive payment methods
they are able to provide price signals to consumers and encourage the use
of less expensive payment methods. By helping to hold down payment costs,
the right to surcharge helps to hold down the price of goods and services
charged to all consumers and reduces the extent of subsidisation between
those who pay with cheaper payment methods and those who use more expensive
methods.

It is important, however that merchants do not impose surcharges in excess of their
actual payment costs. The Bank has had concerns about excessive surcharging
in some sectors for some time. Accordingly, and consistent with the Government's
draft legislation, the Board is proposing to change the Bank's surcharging
standard with the aim of ensuring that customers cannot be surcharged any
more than the cost of accepting cards. The proposed standard preserves the
right of merchants to surcharge for more expensive payment methods but includes
changes to enhance transparency and improve enforcement in cases where merchants
are surcharging excessively.

The draft standard envisages the following framework for surcharging of card payments:

Card schemes will not be permitted to make rules that prevent merchants from recovering
part or all of the costs of accepting card payments.

However, card acceptance costs will be defined more narrowly than in the Bank's
current guidance note, as the merchant service fee and other fees paid to
the merchant's bank (or other payment service provider).

Statements provided by banks to merchants will be required to contain easy-to-understand
information on the average cost of acceptance for each payment method, which
will constitute the maximum permissible surcharge if the merchant chooses
to surcharge.

These statements will express acceptance costs in percentage terms, except where
a merchant's cost of acceptance for a particular payment method is fixed
across all transaction values. This should ensure that merchants –
including in the airline industry – who wish to surcharge will typically
do so in percentage terms rather than as a fixed dollar amount.

Reserve Bank staff will continue to consult with the ACCC and will be working with
banks, other payment service providers and the merchant community to develop
templates for providing information on payment costs to merchants. The Bank
expects that the more specific definition of the cost of acceptance and the
transparency measures that are being proposed will result in enhanced enforcement
of the surcharging framework in cases where merchants may be surcharging
excessively.

Changes to the Bank's Interchange Standards

Interchange fees are fees set by card schemes such as MasterCard, Visa and eftpos
that require payments from the merchant's bank to the cardholder's
bank on every transaction. While there may be a useful role for interchange
fees when a card network is first established, the case for significant interchange
fees in mature card systems is much less clear. Where merchants do not feel
able to decline cards, the incentive is for schemes to raise interchange
rates to induce banks to issue their cards and for banks to then use these
fees to pay rewards to consumers to take and use the cards. Evidence from
a range of countries suggests that competition between well-established payment
card networks can lead to the perverse result of increasing the price of
payment services to merchants (and higher retail prices for consumers).

Accordingly, in 2003 the Bank introduced benchmarks intended to prevent the significant
upward pressure on interchange rates seen in many markets. Contrary to predictions
by the international schemes at the time of the initial regulations, the
Australian cards market has continued to grow very strongly since then and
innovation has thrived. The Bank's reforms have been supported by the
leading Australian consumer and merchant organisations. Following the Bank's
reforms, a number of other jurisdictions have also regulated interchange
fees.

The Bank's Issues Paper drew attention to a number of issues related to interchange
fees:

the decline in transparency for some end users of the card systems, which is partly
because interchange fees have become increasingly complicated and the range
of interchange fee categories has widened

the question of whether there is scope for average interchange fees to fall further,
consistent with falls in overall resource costs in the card systems and
as was contemplated in both the conclusions to the Bank's 2007–08
Review of Card Payment System Reforms and the Final Report of the Financial
System Inquiry

the possibility that the growth of companion card arrangements may indicate that
the current regulatory system is not fully competitively neutral.

Following consultation on these issues with a wide range of stakeholders, the Board
is proposing some changes to the Bank's interchange standards that will
improve competition and efficiency in the card payments market and in the
broader payments system.

The Bank is proposing to modify the credit card interchange standard so that issuance
of American Express companion cards will be subject to the same interchange
fee regulation that applies to the MasterCard and Visa systems. In particular,
interchange fees will be defined to also include fees paid by schemes to
card-issuing banks as incentives to issue cards. In addition, both companion
card issuance and traditional ‘four-party’ card issuance will
be subject to rules on ‘other net payments’ to issuers, so as
to prevent any circumvention of the interchange standards.

The Bank is not proposing to replace the current system of weighted-average interchange
benchmarks with hard caps. The weighted-average benchmark for credit cards
will remain at 0.50 per cent. However, the Bank is proposing to reduce the
weighted-average benchmark for debit cards from 12 cents to 8 cents, consistent
with the fall in average transaction values since the debit benchmark was
introduced.

The weighted-average benchmarks will be supplemented by caps on any individual interchange
fee within a scheme's schedule. It is proposed that no credit card interchange
fee will be able to exceed 0.80 per cent and no debit interchange fee will
be able to exceed 15 cents if levied as a fixed amount or 0.20 per cent if
levied as a percentage amount. These changes are expected to significantly
reduce the extent to which small and medium-sized merchants are disadvantaged
relative to a group of preferred merchants in the MasterCard and Visa interchange
systems.

There are some other proposed changes to the system of benchmarks including a shift
from three-yearly compliance to quarterly compliance. In addition, it is
proposed that all transactions at Australian merchants will be included in
calculations for observance of the benchmarks, with transactions on foreign-issued
cards treated equivalently to transactions on domestic cards. Transactions
on prepaid cards will be included with debit cards in the observance of the
debit benchmark.

Next Steps

The Board seeks views on the draft surcharging and interchange standards as well
as on other issues discussed in the Consultation Paper. The Consultation
Paper also seeks industry views on appropriate implementation dates for any
revised standards. Formal written submissions on these issues are requested
by 3 February 2016.

Given the complexity of issues involving interchange fees and companion cards, it
is unlikely that the Board will take any formal decision on changes to the
interchange standards before its May 2016 meeting. In the case of surcharging,
depending on consultation responses, it is possible that the Board may be
in a position to make an earlier decision on changes to its standards.